Question

1. Compute WACC, given the following: $130MM in debt with interest payments of 7.18% but the ability to borrow at 6.79%, $36MM in preferred equity priced at $18.02 per share with an annual dividend of $1.80 and $288MM in common equity on which investors demand 16.90% return. The company faces a 36% tax rate.

Answer:

(12.76)

2. Compute the geometric average of the following expected future growth rates:

Year 1: 14%

Year 2: -9%

Year 3: 16%

Year 4: 5%

Year 5: 10%

3. Predict the cash flow for year 10 based on the growth of the following annual cash flows:

Year 1: 11,000

Year 2: 11,578

Year 3: 12,185

Year 4: 12,825

Year 5: 13,498

4. Determine the correct discount rate to value the following scenario, assuming there is no end to the timeline and the following data:

Cost of equity = 17.64%

Cost of debt = 7.38%

Debt = $577MM

Equity = $1249MM

Tax rate = 40%

Long-term growth expectations = 3.1%

Future dividends are forecast as follows:

Year 0: n/a

Year 1: 128

Year 2: 148

Year 3: 162

Year 4: 176

Year 5: 183

Answer: 17.64

5. Compute the Terminal Value in the following scenario, assuming there is no end to the timeline and the following data:

Cost of equity = 15.24%

Cost of debt = 7.94%

Debt = $579MM

Equity = $1234MM

Tax rate = 40%

Long-term growth expectations = 3.7%

Future dividends are forecast as follows:

Year 0: n/a

Year 1: 126

Year 2: 150

Year 3: 166

Year 4: 179

Year 5: 185

Answer: 1662.44

6.

Value the following scenario, assuming there is no end to the timeline and the following data:

Cost of equity = 15.23%

Cost of debt = 6.71%

Debt = $578MM

Equity = $1246MM

Tax rate = 40%

Long-term growth expectations = 3.8%

Future dividends are forecast as follows:

Year 0: n/a

Year 1: 129

Year 2: 146

Year 3: 165

Year 4: 176

Year 5: 182

Answer:

(1332.73)

7. Use the data below to compute 2014 Tax Rate:

	2014	2013
Cash	15	16
Short-term investments	9	70
Accounts receivable	370	320
Inventories	552	417
Property, plant & equipment (net)	929	872
Accounts payable	48	31
Short-term debt	95	61
Accrued liabilities	148	135
Long-term debt	658	581
Common stock	130	130
Retained earnings	768	710
Net revenue	3148	2851
Depreciation expense	111	93
Interest	93	60
Taxes	82	82
Net income	254	124

Answer: 24.40

8. Use the data below to compute 2014 OCF (Operating Cash Flow):

	2014	2013
Cash	15	17
Short-term investments	9	68
Accounts receivable	370	316
Inventories	553	417
Property, plant & equipment (net)	927	871
Accounts payable	47	32
Short-term debt	98	64
Accrued liabilities	148	135
Long-term debt	661	583
Common stock	130	130
Retained earnings	771	713
Net revenue	3143	2853
Depreciation expense	114	92
Interest	92	60
Taxes	81	81
Net income	255	123

9.

Use the data below to compute the change in NOWC (Net Operating Working Capital)

	2014	2013
Cash	16	17
Short-term investments	6	65
Accounts receivable	368	318
Inventories	550	415
Property, plant & equipment (net)	926	874
Accounts payable	47	30
Short-term debt	99	60
Accrued liabilities	146	135
Long-term debt	663	584
Common stock	130	130
Retained earnings	767	711
Net revenue	3144	2855
Depreciation expense	114	95
Interest	89	61
Taxes	79	84
Net income	253	122

Answer: 156

10.

Use the data below to compute the change in Gross Fixed Assets (i.e. Change in Gross property, plant & equipment)

	2014	2013
Cash	14	20
Short-term investments	9	70
Accounts receivable	367	320
Inventories	551	420
Property, plant & equipment (net)	926	870
Accounts payable	47	32
Short-term debt	95	60
Accrued liabilities	150	133
Long-term debt	658	582
Common stock	130	130
Retained earnings	769	710
Net revenue	3143	2853
Depreciation expense	113	90
Interest	88	63
Taxes	79	82
Net income	251	123

Answer: 169

11.

Use the data below to compute 2014 FCF (Free Cash Flow):

	2014	2013
Cash	13	20
Short-term investments	5	69
Accounts receivable	366	319
Inventories	555	419
Property, plant & equipment (net)	928	871
Accounts payable	50	35
Short-term debt	96	64
Accrued liabilities	149	135
Long-term debt	663	584
Common stock	130	130
Retained earnings	769	712
Net revenue	3146	2852
Depreciation expense	113	95
Interest	89	60
Taxes	81	81
Net income	255	121

Answer:

(119)

Answer 1

(1) Debt = D = $ 130 million, Preferred Stock = P = $ 36 million, Common Equity = E = $ 288 million

Total Value = 130 + 36 + 288 = $ 454 million

Cost of Debt = Minimum possible borrowing rate = 6.79 %

Cost of Equity = Required Return on Common Equity = 16.9 %

Preferred Stock Price = $ 18.02 and Preferred Stock Dividend = $ 1.8

Cost of Preferred Equity = 1.8 / 18.02 = 0.0998 or 9.98 %

Tax Rate = 36 %

WACC = (1-0.36) x 6.79 x (130/454) + 16.9 x (288/454) + 9.98 x (36/454) = 12.756 % or 12.76 % approximately.

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.